UNCTAD has released a study on The Administration of Fiscal Regimes for Petroleum Exploration and Development. The study illustrates that the ability to administer petroleum agreements is often an issue that does not receive the proper attention it deserves. In many cases, new laws, regulations or contracts are introduced on the assumption that adequate administrative capabilities either exist or will automatically be developed over time. But more often than not, this does not turn out to be the case. There is need therefore to make concerted efforts to bring about a better balance between administrative capabilities and the complexity of petroleum arrangements. The study emphasises that much of the complexity often arises out of government attempts to fully satisfy too many objectives, both of the host governments and those of the transnational oil companies. Yet these are not always fully compatible.

A government would likely favour financial and fiscal devices, which would ensure accelerated exploration, while a company would prefer provisions which left it maximum freedom of action. A company is in general likely to be more amenable to accede to a government´s proposals for higher revenues after discovery, than to proposals for higher exploration expenditures and more onerous work programmes. Similarly, while governments may favour greater control over the disposal of the crude oil and over marketing, or ensuring supplies to meet domestic requirements, companies are apparently prepared to give up a number of percentage points in tax or royalty levels in order to be certain that they will have the resulting crude oil to feed into their downstream operations.

Governments may wish to ensure certain minimum payments by way of royalty to accrue to them, regardless of profits, while companies, having regard to the fact that a royalty formula which operates as a fixed charge upon costs may seriously affect profits when prices are low may well prefer a flexible charge related to profits even if this resulted in a higher expected overall payment.

Companies also prefer a quicker pay-out and thus attach considerable value to accelerated depreciation and other devices which give them a higher initial rate of return, to the extent that they are disposed to agree to compensate by paying higher taxes (related to profits) in later periods. In some cases, however, the host government may have an urgent need for income in the short run and may prefer to balance this against a somewhat higher return for the foreign investor in the long run.

The problem that the study illustrates is that in order to encourage marginal field development, capture a fair share of "windfall profits", stimulate reinvestment of capital, earn the highest possible government take and at the same time encourage exploration of most of the nation´s petroleum potential, one is likely to design extremely sophisticated fiscal systems. Generally, however, fiscal systems that are sophisticated are, at the same time, complex and are particulary difficult for developing countries to administer. Moreover, once systems become too complex they become a disincentive even for investors because of the cost of their own administrative burden.

The structuring of the fiscal regime should therefore be designed after careful balance between various objectives and the administrative tasks involved in implementing them. Governments should determine whether they have the administrative and enforcement capabilities to actually implement the petroleum fiscal regime in question or whether specific programs can be put in place which would be able to build such capabilities in a short time frame. The study elaborates on a number of ways in which administrative capabilities can be enhanced. These include:

attracting more and/or higher quality personnel to the administration;

providing education and training programs to government personnel, abroad and locally;

encouraging more effective internal communication;

improving access to national and international information; and

improving computer hardware and software capabilities.

The study suggests that, for many developing countries experiencing difficulties in the administration of their petroleum fiscal regimes, the most immediate and effective solution is just to simplify the petroleum fiscal regime. It elaborates on how this can be done by changing the whole petroleum fiscal regime, or by changing some of the fiscal features included in the petroleum arrangements, or by modifying the individual fiscal features.

UNCTAD´s Advisory Services on Investment and Technology (ASIT), which produced the study, provides technical assistance related to formulating or reviewing national petroleum policies, laws and regulations, including taxation in the petroleum sector; and drafting or reviewing model contracts.